Business Directories

UAE bank deposit growth slows

Dubai, November 10, 2011

A sharp slowdown of bank deposit growth in the United Arab Emirates suggests inflows of money into the country are slowing or even reversing, as low interest rates deter depositors and the impact of the Arab Spring fades.

Annual growth of deposits at UAE banks, which remained below 7.5 percent throughout last year, hit double-digit rates in February this year and a peak of 16.0 percent in April. Growth stayed extremely strong through July, when it was 11.5 percent.

Bankers and analysts said two main factors seemed to be behind the growth. One was capital flight into the UAE, which has remained politically stable this year, from countries in the Gulf and North Africa which experienced political turmoil; growth in non-residents' deposits, which account for roughly a tenth of total deposits, hit 40 percent in February.

The other main factor was relative interest rates, which persuaded companies and individuals, from the UAE and other countries, to put money into UAE bank deposits. The indicative three-month UAE interbank lending rate was above 2.0 percent in the first quarter of this year, far above near-zero interest rates for the US dollar, to which the UAE's dirham is pegged; as the global and US economic outlook worsened earlier this year, it became increasingly clear that US rates were likely to stay ultra-low for years.

But UAE deposit growth began slowing considerably in August, when it fell back to 7.3 percent, and it hit a ten-month low of 5.3 percent in September, according to the latest data from the central bank. On a month-on-month basis, deposits have actually declined slightly every month since July.

Analysts said both major factors behind deposit growth had weakened. Fresh fund inflows due to the Arab Spring have decreased and may even have reversed on a net basis, possibly because the initial, heavy wave of capital flight has run its course, and perhaps because of a partial return of stability to countries affected by the turmoil.

"We've had inflows of hot money because of unrest in the region -- basically people just took their money back. It is probably going to be volatile for a couple of months, probably a bit longer," said a banking analyst at a major UAE bank, who declined to be named because of the sensitivity of the issue.

At the same time, investors seem to be abandoning the UAE interest rate trade. In response to the build-up of deposits at banks, the indicative three-month UAE interbank lending rate slid as low as 1.47 percent in August, making UAE deposits much less attractive.

"When we look at what banks in the UAE were paying for deposits at the beginning of the year and what they are paying now, those rates have come down. The spread between Eibor and Libor rates has narrowed over the summer, making UAE deposits less rewarding," said Khatija Haque, senior economist at Emirates NBD bank.

Outstanding certificates of deposit dropped from 119.2 billion dirhams ($32.5 billion) in May to 86.7 billion dirhams at the end of September, according to central bank data. Giyas Gokkent, chief economist at National Bank of Abu Dhabi, said this was a strong sign that short-term money was exiting the UAE interest rate trade.

Some of this money left the country, but trading in the foreign exchange market does not suggest extremely heavy fund outflows from the UAE. Six-month onshore dollar/dirham forwards, which fall as pressure for dirham appreciation against its peg increases, dropped from around plus 20 points at the start of this year to as low as around minus 20 in August, but have now rebounded only partially, to around minus 5.

A treasury source at a UAE bank said a lot of money taken out of deposits over the past three months did not leave the country, but was shifted to other instruments with higher returns, such as structured products. - Reuters